Intra-EU Arbitration under the ECT Found Incompatible with EU Law

On 2 September 2021, in Republic of Moldova v. Komstroy, the Court of Justice of the European Union (the “CJEU”) ruled that Energy Charter Treaty (“ECT”) based intra-EU arbitrations were contrary to EU law.[1]

Background of the Case

Energoalians, a Ukrainian producer initiated, an ad hoc arbitration procedure provided for in Article 26(4)(b) of the ECT against the Republic of Moldova.

On 25 October 2013, the ad hoc arbitral tribunal rendered its award in favor of Energoalians. According to the arbitral tribunal, the Republic of Moldova had failed to comply with its international obligations and was thus ordered to pay a sum of money to Energoalians on the basis of the ECT.

A month later, the Republic of Moldova brought an action for annulment of the award before the Court of Appeal of Paris, France. On 12 April 2016, the Court of Appeal annulled the arbitral award on the ground that the arbitral tribunal wrongly declared it had jurisdiction. The court considered that due to the absence of economic contributions by Energoalians in Moldova, there was no investment within the meaning of the ECT.

The successor of Energoalians, Komstroy, appealed the decision. By a judgment dated 28 March 2018, the Cour de Cassation set aside the decision rendered by the Court of Appeal on 12 April 2016, on the ground that the Appeal court added a condition to the interpretation of the concept of investment which was not provided for in the ECT.

The case was thus referred back to the Court of Appeal sitting in a different composition.

Before the Court of Appeal, the Republic of Moldova claimed that there was no investment from Energoalians within the meaning of Article 26(1) of the ECT read in light of Article 1(6) of the ECT and thus the dispute could not be subject to arbitration proceedings.

To the contrary, Komstroy argued that the ad hoc arbitral tribunal had jurisdiction over the dispute because all the conditions mentioned in Article 26(1) of the ECT were satisfied.

The Court of Appeal decided to stay the proceedings and refer it to the CJEU for a preliminary ruling on the following questions:[2]

Must Article 1.6 of the Energy Charter Treaty be interpreted as meaning that a claim which arose from a contract for the sale of electricity and which did not involve any contribution on the part of the investor to the host State constitutes an “investment” within the meaning of that article?
Must Article 26(1) of the Energy Charter Treaty be interpreted as meaning that the acquisition, by an investor of a Contracting Party, of a claim established by an economic operator which is not from one of the States that are Parties to that Treaty constitutes an investment?
Must Article 26(1) of the Energy Charter Treaty be interpreted as meaning that a claim held by an investor, which arose from a contract for the sale of electricity supplied at the border of the host State, can constitute an investment made in the area of another Contracting Party, in the case where the investor does not carry out any economic activity in the territory of the latter Contracting Party?

The CJEU’s Decision

The CJEU responded that the definition of investment in Article 1.6 of the ECT required an economic contribution from the investor in the host State and thus there was no need to answer to the second and third questions.

Even if the question had not been asked by the Court of Appeal, but only raised by the European Commission and certain EU member States, the CJEU also gave an opinion on whether Article 26 of the ECT was compatible with EU law, as it provided for arbitration between EU-based investors and EU Member States.

The CJEU concluded that intra-EU arbitration under the ECT was incompatible with EU law.

To come to this conclusion, the reasoning of the CJEU was the following:

First, the CJEU considered that national courts of EU members could make preliminary reference to the CJEU pursuant to Article 267 of the Treaty on the Functioning of the European Union which reads as follows:

The Court of Justice of the European Union shall have jurisdiction to give preliminary rulings concerning:
(a) the interpretation of the Treaties;
(b) the validity and interpretation of acts of the institutions, bodies, offices or agencies of the Union;
Where such a question is raised before any court or tribunal of a Member State, that court or tribunal may, if it considers that a decision on the question is necessary to enable it to give judgment, request the Court to give a ruling thereon.
Where any such question is raised in a case pending before a court or tribunal of a Member State against whose decisions there is no judicial remedy under national law, that court or tribunal shall bring the matter before the Court.
If such a question is raised in a case pending before a court or tribunal of a Member State with regard to a person in custody, the Court of Justice of the European Union shall act with the minimum of delay.

According to the CJEU, “In order to ensure that those specific characteristics and the autonomy of the legal order thus created are preserved, the Treaties have established a judicial system intended to ensure consistency and uniformity in the interpretation of EU law. In accordance with Article 19 TEU, it is for the national courts and tribunals and the Court to ensure the full application of that law in all the Member States and to ensure effective judicial protection of the rights of individuals under that law, the Court having exclusive jurisdiction to give the definitive interpretation of that law.”[3]

Second, because the EU is a contracting party to the ECT, the ECT is an act of EU law:[4]

It is apparent from the Court’s settled case-law that an agreement concluded by the Council, pursuant to Articles 217 and 218 TFEU constitutes, as regards the European Union, an act of one of its institutions, that the provisions of such an agreement form an integral part of the legal order of the European Union from the time it enters into force and that, in the context of that legal order the Court has jurisdiction to give a preliminary ruling on the interpretation of that agreement.

Third, as the ECT is an act of EU law, an ECT arbitral tribunal would necessarily be required to interpret, and even apply, EU law when deciding a dispute under Article 26 of the ECT.[5] Accordingly, the CJEU ascertained whether an ad hoc arbitral tribunal was within the judicial system of the EU and whether it could be regarded as a court or a tribunal of a Member State within the meaning of Article 267 of the Treaty on the Functioning of the European Union. The CJEU concluded that because arbitral tribunals are outside the EU legal system, they could not provide for an effective control over EU law.

Finally, to support its position, the CJEU made the distinction between commercial arbitration and arbitration referred to in Article 26 of the ECT. According to the Court, contrary to investor-State arbitrations, commercial arbitrations “originate in the freely expressed wishes of the parties concerned”.[6]

Impact of the CJEU’s Decision on Intra-EU Arbitration

The CJEU’s ruling largely follows the reasoning in Achmea BV v Slovak Republic. Even if the CJEU’s decision has no impact on future rulings from arbitral tribunals formed in accordance with Article 26 of the ECT, investors may be sceptical to invest as their protection within the EU is less certain.

This risk applies even more now that for instance, in France, the day after Republic of Moldova v. Komstroy decision was rendered, the General Directorate of the Treasury published in a press release, that no arbitration based on the ECT shall be initiated by an EU investor against a member State of the EU:

Dans ce contexte, la Direction générale du Trésor souhaite à nouveau attirer l’attention des investisseurs français opérant au sein du marché intérieur et des investisseurs européens présents en France sur le fait qu’aucune nouvelle procédure de règlement des différends investisseur-État ne devrait être engagée contre un État membre de l’Union européenne en application de la clause d’arbitrage du TCE